Monday the National Bureau of Economic Research (NBER) formally announced that the United States is in an economic recession. While stocks dropped sharply the day of the announcement, it really wasn’t much of a surprise. It’s kind of like calling a press conference and announcing that the New York Giants won the Super Bowl. Everyone who is interested already knows.

In announcing its findings, the NBER noted that the U.S. economy peaked in December 2007 and has been contracting since then. The peak marked the end of the expansion that began in November 2001 and lasted 73 months. According to the statement from the NBER, “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.”

While the official recognition of a recession is underwhelming, we might be able to glean some valuable information by comparing the current economic downturn to prior periods of economic weakness. For example, since 1945 the NBER has identified 10 complete cycles of contraction and expansion. On average, the contractions lasted 10 months and the expansions persisted for 57 months. Since 1854 there have been 32 cycles and the average contraction lasted 17 months.

These contractions do not directly coincide with stock market index peaks and bottoms. According to the NBER, the prior contraction began in March 2001 and ended in November 2001. While the equity market indexes peaked in early 2001, the stock market bottom did not occur until Fall 2002.

If something similar occurs this time, equity markets could continue to decline for many months after the economy begins to expand. No one knows exactly when this contraction (recession) will end, but it seems likely to persist until the credit crisis is resolved and until the global real estate market strengthens.

The longest contraction of the 20th Century was 43 months beginning in August 1929–a period commonly known as the beginning of the Great Depression. Since then the two longest contractions have each lasted 16 months. One began in November 1973 and the other in July 1981. I remember the latter particularly well because it coincided with my graduation from college. 

The current economic situation seems much more dire than the turmoil of 1981. If asked to make a prediction, I would anticipate that this recession will last for at least another six to eight months. That estimate is based on things like Fed Chairman Bernanke’s comments today that more action is needed to cut mortgage foreclosures. It is going to take lawmakers a minimum of two or three more months to come up with substantive economic rescue plans, then a few months for those plans to begin to have an impact.

Continued market volatility is likely until there is substantial evidence that the economy has turned the corner.

If you would like to read the official announcement about the recession from the NBER, you can find it and a host of other interesting economic data at the NBER web site: www.nber.org
F.S.

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